SMM Daily Review - 2011/9/5 Base Metals Market

SHANGHAI, Sept. 6 (SMM) --
Copper:
SHFE 1111 copper contract prices, the most active one, opened down RMB 260/mt at RMB 67,650/mt on Monday, with prices moving downward after a low open. After the opening, SHFE three-month copper contract prices met resistance when trying to move towards RMB 68,000/mt, and reached a high at RMB 68,030/mt. Later, as Chinese stock markets slid by nearly 2% at the opening, and since LME copper prices lost USD 9,000/mt, SHFE three-month copper contract prices moved lower, and touched a low RMB 67,080/mt in the afternoon session. Finally, SHFE 1111 copper contract prices closed at RMB 67,100/mt, down RMB 810/mt, or a loss of 1.19%. Positions for SHFE 1111 copper contracts were up 2,002 lots, and trading volumes were up 16,444 lots. Short investors actively built new positions at high prices. From technical indicators, SHFE three-month copper prices were facing more pressures to fall back, and would likely lose the support of the 20-day moving average.      

In the spot market, as SHFE copper prices moved lower after a low open, offers for high-quality copper turned into premiums, initially reporting between discounts of negative RMB 50/mt and premiums of positive RMB 50/mt today. Offers for standard-quality copper also turned into premiums, since SHFE copper prices slid by nearly RMB 300/mt during spot copper trading hours. Overall spot offers were between premiums of RMB 0-80/mt. Trade prices for standard-quality copper were between RMB 67,680-67880/mt in the morning business, and RMB 67,750-68,000/mt for high-quality copper. Market circulation was mainly high-quality copper during the whole trading day. Price quotations were unstable due to turbulent market sentiments, while downstream producers chose to stand on the sidelines, resulting in poor market transactions. SHFE copper prices slumped by more than RMB 200/mt again in the afternoon session, but there were limited transactions. In this context, copper premiums failed to increase, reporting between discounts of negative RMB 20/mt and premiums of positive RMB 50/mt. Traded prices already fell between RMB 67,500 -67,700/mt.  

SMM conducted a survey with regard to copper price trends this week.

Based on the survey, about 76% industry insiders believed LME copper prices to move between USD 9,000-9,300/mt, and SHFE copper prices between RMB 67,000-68,500/mt. The recently announced US non-farm payrolls were the worst since September 2010, and the unemployment rate was also high at 9.1%. Besides, the five-year US bank Credit Default Swap (CDS) used to be higher this year than that during the financial crisis period, all signaling uncertainties in the US economic prospects, and falling short of the forecasts of positive economic recovery claimed earlier. Even if Obama can get approval of his plan to boost economy and create jobs this week, market concerns will not be easily reassured. As a result, markets will keep cautious towards holdings of positions, and both long and short investors will mainly make intraday operations. The European debt problems persist, with August economic index touching the lowest since March 2010 and the unemployment rate increasing by 10%. With the arrival of deadlines for European countries' debts in September, banks in Greece and Italy will not likely bear the high interest rates and have the risk of defaults, and thus will create panic sentiment in the markets. China's PMI data has been at low levels, also triggering panic sentiment. Technical indicators of LME and SHFE copper prices are also pointing downward, and the pressures at the moving averages are increasing. Meanwhile, due to a string of poor economic results, the expectation of the US introduction of quantitative easing is growing, and the US dollar index hovers around 74 points, which will well support the end copper prices. The longs and shorts will struggle at USD 9,000/mt. In Chinese markets, as downstream producers will gradually step out of the seasonal low demand period in September, demand will improve somehow. Downstream producers took advantage of copper price drops to increase purchases, and stocking needs before the Mid-Autumn Festival and National Holiday will promote market transactions. Spot copper market will provide support for the end copper prices.   

The remaining 24% insiders were pessimistic about copper prices, believing LME copper prices will lose USD 9,000/mt and test USD 8,800/mt, and SHFE copper prices will fall near RMB 66,000/mt. As of last week, total position holdings of SHFE copper fell from 360,000 lots in January to around 300,000 lots, a sign of investor cautious sentiment and reduced confidence about future copper prices amid weak economic recovery and risky financial markets. From copper inventories last week, both SHFE and LME copper inventories increased significantly, highlighting the characteristic of market oversupply, which will weigh on copper prices. As a result, copper prices will move downward to find support due to the above mentioned negative factors.     

Aluminum:
Most active SHFE 1111 aluminum contract opened slightly lower at RMB 17,405/mt on September 5th, due to renewed worries towards US economic recession among investors. After hitting an intraday high of RMB 17,480/mt at the beginning, the contract fell to RMB 17,315/mt, a two-week low, after Shanghai Composite Index fell below 2,500 points, and finally closed RMB 70/mt or 0.40% lower at RMB 17,345/mt near the 20-day moving average. Short positions of the contract increased 3,266 lots, thereby adding to selling pressure for the contract. SMM expects most active SHFE aluminum contract to test support at RMB 17,300/mt in the short term.

Morning trading prices of spot aluminum in Shanghai were between RMB 17,780-17,820/mt, with premiums of positive RMB 70-100/mt over SHFE current-month aluminum prices. Though goods holders were unwilling to sell at lower prices and most kept quotes firm at RMB 17,800/mt, lower priced supplies were still seen on rare purchases. Nevertheless, overall market transactions were sluggish. Mainstream trading prices of spot aluminum fell to RMB 17,750-17,760/mt in the afternoon with continued falling of SHFE aluminum prices. Spot premiums over SHFE current-month aluminum prices also narrowed to almost zero, with most goods holders unwilling to sell at lower prices and supplies rarely seen. A few middlemen entered the market to build up inventory after spot prices fell, but transactions were sparse.

SMM weekly average price for aluminum ingot was RMB 17,810/mt for the week from August 29th to September 2nd, up slightly by RMB 22/mt or 0.12% from previous week.

Latest SMM survey shows 65% of market respondents are neutral towards future aluminum price trend, as they believe positive factors and negative factors will meet a balance. For example, selling pressure from a dim future for global economy will be offset by supply woes caused by power restrictions in south China, as well as consumption improvement expectations along with progresses of China’s affordable housing projects and warming up of automobile sales in 2H.

26% of respondents are pessimistic towards future aluminum prices. They think aluminum ingot consumption will not likely warm up in the short term, saying that recession worries towards US economy, as fueled by its high unemployment rate, and remaining high inflation pressure in China will damp buying interest thus hugely weaken upward momentum of aluminum prices.

Remaining 9% of respondents are optimistic towards aluminum prices during this week. Their optimism was based on slight improvement of buying interest following alleviation of capital pressure at enterprises, as well as limited stock at goods holders to help keep quotes firm.

Lead:
SHFE 1110 lead contract prices briefly surged to RMB 16,720/mt after opening lower at RMB 16,560/mt on Monday, with prices facing strong pressure from the 5-day and 10-day moving averages. Later, SHFE 1110 lead contract prices fluctuated lower following stock market trends, with prices mainly moving between RMB 16,530-16,560/mt in the afternoon session and finally closing at RMB 16,555/mt, down RMB 80/mt. Trading volumes fell slightly by 74 lots to 698 lots, while positions decreased by 100 lots to 3,800 lots.

As SHFE lead prices fell back after opening higher, initial quotations for domestic well-known branded lead like Chihong Zn&Ge and Nanfang were RMB 16,350/mt, with discounts of negative RMB 350/mt against SHFE 1110 lead contract prices, but later quotations fell to RMB 16,300/mt following SHFE lead prices, with spot discounts unchanged. In the afternoon business, quotations for well-known branded lead slipped again to RMB 16,200/mt, while almost no quotations for other brands were heard in the market, keeping trading sentiment quiet.

With regard to lead price trends this week, 26.7% of insiders are pessimistic. The growth in the number of US non-farm employment for August was much lower than the expected 75,000, extending concerns over stagnation in US economy. The PMI in the Euro zone was also lower than expected, and China’s central bank included commercial banks’ margin deposits in required reserves starting this week. In this scenario, lead prices should fall to RMB 16,100/mt.

20% market players are bullish on lead prices. The disappointing US employment data released last Friday helped improve the possibility of QE3, and they expected Obama will announce some stimulus policies this week. Domestic smelters reduced goods supply on optimistic speculations, while power restrictions are still in place, with goods supply insufficient in Henan due to the after effects from environmental protection inspections. As a result, lead prices will rise to RMB 16,500/mt.

The remaining 53.3% are neutral toward lead price trends, believing prices will fluctuate around RMB 16,300/mt given the poor US employment data and domestic smelters’ holding goods.

Zinc:
SHFE 1111 zinc contract prices opened slightly lower at RMB 17,015/mt on Monday, and later faced pressure from the 5-day moving average and lacked upward momentum after briefly climbing to RMB 17,165/mt in the morning session, with prices later falling gradually below the daily moving average. SHFE 1111 zinc contract prices even plummeted below RMB 17,000/mt in the midday due to strong short selling momentum, with prices mainly moving between RMB 16,950-17,000/mt in the afternoon session and finally closing at RMB 16,945/mt, down RMB 135/mt or 0.79%. Trading volumes increased by nearly 40,000 lots to 382,320 lots, while positions fell by 10,906 lots to 264,074 lots. 

In spot markets, traded prices for #0 zinc were around RMB 16,950/mt in the morning session, but later fell to between RMB 16,800-16,850/mt as SHFE zinc prices tumbled, with spot discounts against SHFE 1110 zinc contract prices remaining at negative RMB 80/mt. #1 zinc was traded between RMB 16,750-16,850/mt. Most market players stayed out of the market when zinc prices were low, and trading volumes were limited. Spot prices even fell to RMB 16,800/mt in the afternoon, but most buyers were still standing on the sidelines.
 
The worse-than-forecast US non-farm employment data for August triggered speculations the US Federal Reserve will announce QE3 at its September meeting. Meanwhile, China’s central bank ordered commercial banks to include margin deposits in required reserves starting this Monday.

With regard to zinc price trends this week, 50% of market players believe prices will continue fluctuating. The worse-than-forecast US employment data will cause the Fed to develop further economic stimulus policies, including the possibility of QE3. On the other hand, downstream operation will improve during the high demand season. In this context, SHFE three-month zinc contract prices should move between RMB 17,000-17,500/mt, with spot zinc prices expected to be between RMB 16,600-17,100/mt.

33% market players believe that SHFE three-month zinc contract prices will fluctuate between RMB 16,700-17,200/mt. Current economic condition will not improve even if QE3 is announced. In addition, prices are firm as smelters have been holding goods, or moved goods modestly, so zinc prices will not fall sharply, with spot prices expected to fluctuate between RMB 16,500-16,800/mt.

The remaining 17% believe zinc prices are likely to fall. Despite a possibility of QE3, the debt crisis in Euro zone still continues, and China is implementing prudent monetary policies. In addition, downstream production runs were still low. In this context, SHFE three-month zinc contract prices will fall slightly to move between RMB 16,400-16,800/mt, with spot prices close to or slightly lower than SHFE zinc prices.

Tin:
Trading prices of tin in Shanghai were little changed from last Friday. Yunxi, Yunheng, Yunxiang, Nanshan and Lvsexinan etc. branded tin was traded between RMB 195,500-197,000/mt. Mainstream trading price for Yunxi and Yunheng branded tin was RMB 196,800/mt, with transactions at RMB 197,000/mt rarely seen. Transactions remained sluggish in the market as goods holders’ confidence to stick to their quotes was damped by inrush of imported tin.

Latest SMM survey shows 60% of market respondents expect domestic tin prices to continue falling, as upward momentum in LME tin prices was stricken by disappointing US non-farm employment data and inrush of imported tin will further damp the already weak domestic consumption. Remaining 40% of respondents are neutral toward future tin price trends as they believe weak consumption will be offset by support from high raw material cost and tight supply.

Nickel:
Last Friday, LME nickel prices opened at USD 21,700/mt and closed at USD 21,460/mt, down by USD 315/mt from a day earlier, with the highest price at USD 21,807mt and the lowest price at USD 21,225/mt. On Monday, LME nickel prices advanced slightly to USD 21,600/mt after opening at USD 21,500/mt. Later, LME nickel prices were weighed down to hit a low of USD 21,120/mt due to stronger US dollar. Last Friday’s weaker-than-expected non-farm employment data from the US depressed market sentiment. LME nickel inventories were 102,408 mt, down 882 mt from a day earlier.

In the Shanghai nickel spot market, steady decline of LME nickel prices negatively affected transactions in spot market. Transactions were quiet and traded prices slipped all the way in the Shanghai nickel spot market. Mainstream traded prices of nickel from Russia were in the RMB 161,000-161,300/mt range, and mainstream traded prices of nickel from Jinchuan Group were in the RMB 161,200-161,500/mt range. Transactions were largely made among traders in the morning trading hours, with few downstream consumers entering market.

Based on result of an SMM survey, 60% market players believe that nickel prices will be neutral and will fluctuate around USD 21,500/mt in the following week. 25% market players expect that nickel prices will continue to fall. The remaining 15% market players hold that nickel prices will bottom out in the short term, but any rebound will be limited. Although market views are mixed, it is widely believed that nickel prices will not fluctuate widely, with growth and losses both limited.